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HMRC issuing letters to businesses that may be diverting profits

The UK's HM Revenue & Customs (HMRC) has begun issuing letters to businesses that may have a liability to diverted profits tax (DPT).06 Feb 2019

The letters follow the announcement last month that HMRC is launching a compliance facility enabling businesses that may have tax liabilities as a result of 'profit diversion' to settle potential liabilities with lower penalties than if HMRC had instigated an enquiry into their affairs.

The letters are being sent to groups which HMRC has identified as having "features commonly associated with arrangements targeted by the DPT legislation". They ask if the group is confident that DPT does not apply to it, pointing out that recent developments in international taxation may mean that the group is not reporting and paying tax on the right amount of UK profits.

The recent developments mentioned include the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting (BEPS) review, which included clarifications on the allocation of profits between entities in a multinational group for transfer pricing purposes, as well as DPT and new rules on withholding tax on royalties.

"It is clear that HMRC believes that there are a number of businesses which have not done enough in terms of revisiting their transfer pricing policies to make sure that they take account of changes in the international tax system and that what was envisaged when the policies were established is what has actually happened in practice," said Jason Collins a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com.

HMRC's guidance in relation to the compliance facility makes it clear that HMRC will not necessarily send letters to all businesses it has identified as being at risk.

"All multinational businesses should be reviewing their transfer pricing policies and their potential exposure to DPT," Collins said.  

"Anyone who considers they may have a liability should seriously consider using the compliance facility. A disclosure under the facility will be treated as 'unprompted' which should take any penalty down to zero in most cases," Collins said. "In particular, the facility offers a route to avoiding a penalty for breaching the obligation to notify potential chargeability to DPT which is not otherwise available."

"You can't use the facility if you are already 'under investigation' - assessed at the time you register - but HMRC have made it clear in discussions we have had with them that if you have simply notified that you are potentially chargeable to DPT, this alone may not mean that you are 'under investigation' for these purposes, and so you may be able to use the facility," he said.

HMRC is running a webinar to discuss the profit diversion compliance facility on 27 February at 12:00pm UK time, which you can register for here.